What are Intercompany Recharges?
If you incur costs on behalf of another company – you may wish to recharge them. This may be an external company – a client or associate for example, or it may be a company within your group.
For financial reporting purposes – revenue recognition principles require that the cost and the income should be shown gross in your profit and loss account. What this means is that you account for the recharge as part of your income and your costs as part of your overhead in the profit and loss account – rather than net the cost off against the recharge in a single expense or income account thereby showing gross sales and costs.
For management accounting purposes – there is no reason why you should not group the rechargeable costs and the recharged costs in the P&L – the balance should net to zero which confirms you have recharged all of the costs you have incurred on behalf of others.
Firstly – set up revenue and overhead general ledger accounts in your chart of accounts > Settings > General Settings >> Chart of Accounts.
Say A Ltd incurs a cost on behalf of B Ltd of £250 with City Limousines.
- The supplier belongs to A Ltd, and will be paid by A Ltd.
- A Ltd will recharge to B Ltd and B Ltd will pay A Ltd.
- The costs and the recharge will be shown gross in A Ltd’s P&L.
- The cost will net off against the income to nil effect in A Ltd’s accounts.
- The cost will show as a charge in B Ltd’s accounts.
1. Process the bill in A Ltd. Pay the supplier as normal.
2. Recharge the costs to B Ltd by raising a sales invoice to B Ltd.
3. Check A Ltd’s profit and loss account to ensure that recharged costs offset recharged income. In this example I have edited the layout of the profit and loss account to group recharged costs against recharged income so it’s easier to check that they net off.
4. Add the cost to B Ltd’s Xero account. This time the costs will be accounted for as an overhead.
5. The cost will show in B Ltd’s profit and loss account.
6. The accounting entries are as follows:
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